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A painful legacy

The Edper group struggles to simplify itself

A painful legacy
DEIRDRE McMURDYJanuary41993

A painful legacy

The Edper group struggles to simplify itself

DEIRDRE McMURDYJanuary41993

A painful legacy

BUSINESS

The Edper group struggles to simplify itself

DEIRDRE McMURDY

The past year was a cruel one for the senior executives of the Edper corporate empire. As the economic recession continued to take its toll, the sprawling group of companies controlled by Peter and Edward Bronfman was under siege on almost every front. Even in the final weeks of 1992, Edper’s problems ranged from Toronto-based Bramalea Inc.’s bankruptcy protection filing last week to a dramatic $1.3-bülion write-down on the group’s extensive real estate investments the previous week. At the same time, credit analysts at agencies in Canada and the United States downgraded the ratings for seven of the group’s top companies. Those developments took place against a backdrop of steadüy eroding share prices for core Edper companies. Meanwhüe, belated attempts to address shareholders’ concerns—and bolster share values—in more remote comers of the empire succeeded principally in bringing new problems to the surface.

For almost three years, senior Edper managers have repeated their intention to simplify the complex corporate structure of the group, combining assets to realize greater operating efficiencies and making Edper stocks easier to understand. A proposal in early December to consolidate the energy assets of resources conglomerate Noranda Inc. was one of the first steps in that direction. But the move to

join Norcen Energy Resources Ltd. and North Canadian Oüs Ltd., both of Calgary, illustrated that talking about such a massive restructuring effort is considerably easier—and cheaper— than achieving it.

Indeed, the obstacles now confronting Noranda in its bid to merge the two energy companies foreshadow a rocky road ahead. The Ontario Securities Commission requires an elaborate—and expensive—series of independent valuations and legal opinions for each transaction. As well, independent corporate directors, increasingly aware of their personal liability during such deals, are especiaUy skittish. “The time has come for the empire to face reality and consolidate,” said one investment banker, who requested anonymity. “Unfortunately for them, the regulators are waiting for them with new rules that make this process as painful as possible.”

But one key issue has already come to symbolize the challenge of deconstructing the Edper edifice: the tangled cross-ownership of preferred shares that are issued by some group companies and owned by others. Under federal tax regulations, most preferred-share dividends flow to investors on a tax-free basis. Untü the introduction of tax reform legislation in 1987, corporations also received tax-related benefits through the issue of preferred shares. Capitalizing on that market niche, a wide array

of Edper affiliates issued about $5 billion in preferred shares starting in the mid-1970s.

Historically, one of the largest buyers of preferred shares were highly profitable financial institutions, which were able to shelter some of their earnings from tax through such investments. But Edper’s preferred shares also allowed senior group managers to indulge a shared obsession for minimizing corporate tax bills by creating massive portfolios of socalled famüy preferred shares for the operating companies that they controlled. “It’s a highly unusual practice for operating companies to have such extensive preferred-share holdings,” said Montreal-based analyst Jacques Kavafian, who tracks Edper-controlled John Labatt Ltd. for Lévesque Beaubien Geoffrion Inc. He added: “Corporate managers should be running companies—not portfolios.” Labatt’s portfolio is currently valued at about $260 million. As the corporate architects of Edper g now struggle to respond to market demand for g restructuring, the pressure of coping with I these intricately interlocked preferred shares s has mounted. When Noranda announced that it I would merge Norcen and North Canadian, the I senior holding company also undertook to “ “assist” both companies in disposing of their Edper preferred shares. Norcen has a portfolio valued at about $250 million and North Canadian’s is pegged at about $121 million. Said Barry Cochrane, president and chief executive officer of Norcen: “We know that our preferred holdings haven’t been looked on favorably and it sure won’t hurt the share price to sell them.”

The challenge of disposing of the preferred shares held by the merging energy companies, however, will not be easy in the present market. Demand for preferred shares has already cooled significantly because the economic recession has meant that fewer Canadian companies are profitable, and they no longer require preferred shares to avoid tax. Concerns about the security of the dividends payable on Edper preferred shares have also compounded the problem of an oversaturated market, according to experts. “Everyone is already so stuffed with Edper paper, they can’t swallow another bite,” said one Toronto-based trader, who spoke on condition of anonymity. “They have to make their own market for the stuff.”

Last week, the Series J preferred shares issued by Royal Trasteo Ltd., with a $25 face value, dropped to $5 a share from $7 in a single block trade on the Toronto Stock Exchange. As well, in late November, the Toronto-Dominion Bank took a provision against its portfolio of preferred shares, many of them issued by Edper affiliates, which had declined by more than 25 per cent below book value. Said analyst Kavafian: “Labatt management always insists that its preferreds are transferable into cash. The question is, how long would it take to do that?” For the top managers of the embattled Edper group, that is just one of the many pressing questions they wül have to confront in the coming year.

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